It feels to me like we’ve crossed the Rubicon. I knew we had in August 2007 when it became apparent that Northern Rock’s shadow bank, Granite,was going to pull the edifice down. It felt the same way in the summer of 2008 when it was clear that the banks were heading for bust. This morning it feels that the euro is heading the same way.

Yields on Euro denominated bonds from Ireland, Portugal and Spain reached record levels yesterday. In other words, the Irish austerity package has done nothing to calm the markets. The neoliberal prescription has failed. Worse, talk of contagion now spreads to Belgium and even the Netherlands and France.

I can see no rational reason for most of this: the Irish economy is, I admit, a basket case. US businesses such as Intel, Pfizer and Microsoft are all saying this morning that Ireland must resist pressure from France and Germany to raise corporate tax rates: but they would, wouldn’t they? What do they care about Ireland? As Simon Johnson, the former chief economist at the IMF notes in the New York Times:

At least 20 percent of Ireland’s G.D.P. is from “ghost corporations” that have little or no real activity in Ireland. Corporate taxes are set at 12.5 percent, but leading global corporations are able to construct complicated schemes involving other offshore tax havens that reduce their effective tax rates to the low single digits.

The Irish insist that raising the corporate tax rate would not generate additional revenue – effectively acknowledging the point that this part of the economy cannot be taxed as part of the anti-crisis policy mix. You will know that reality has finally set in when all the relevant numbers are presented relative to G.N.P., not G.D.P.

Northern Rock had a shadow bank. Ireland has more than one shadow economy: there is, of course, the illicit sector that every economy suffers but in its case there is this second shadow – the efficiently condoned but entirely uncontrolled (or is it uncontrollable?) Corporate shadow that supposedly lifts income and well-being and Ireland but in fact merely made passes through, leaving hardly a taste of tax or employment behind.

It is these shadows that are bringing economies to their knees. Ireland has lost the ability to manage its economy,to make choices in the best interests of its people,to impose tax where tax is due, and all because of this shadow.

States as large as France are subject to doubt as to their ability to pay, not because there is anything fundamentally wrong with their economy but because the shadow of international finance – the bankers, the hedge funds and investment managers who are supposed to represent the best interests of their customers, such as your pension fund and my pension fund – that shadow has fallen across their debt, and so we must all suffer.

I admit, I am worried. I was worried in September 2008: worried enough to buy reserve stocks of food at that time. I’m not doing that, just yet. But in some ways this situation feels even more troubling. The shadow seems now to be out of control, and to be bringing about the very crisis that could bring its own destruction. It will only take one major sovereign debt failure, a failure not caused by underlying economic reality, but by the impact of the shadow of banking, for bank contagion to spread like wildfire. If Ireland failed then so would banks in the UK, Germany and Belgium. Belgium, currently without a government since last April, could then fail in turn due to failure to support its banks. And the process could spread.

This situation has developed for obvious reason: we did not nationalise banks when we should have done in 2008. The resulting opportunity to reform the banks has been missed . The political will did not exist. Tax haven activity has been allowed to continue. And those fault lines are at the core of the current crisis.

Can we get through the next few weeks? We can, but there are big caveats. First, there has to be a willingness to close markets when they threaten stability. Markets do not come first.

Second, there has to be a willingness to say that the banking system of the world is failing and only by bringing it into state control, probably without compensation, can we reclaim necessary control of economies from the irrationality of those who seek to destroy them. If both sound like wartime measures then so be it: that’s how serious I consider this situation to be.

Third we have to be willing to pump any amount of money into the economy to maintain liquidity, and that will mean hard cash on occasion when people demand it. I sincerely hope the printing presses are running.

Fourth,whilst talking of printing money, the European Central Bank will have to undertake quantitative easing, purchasing the debts of Ireland, Spain, Portugal and any other country risk of default to achieve four goals. The first is liquidity,the second is the reduction of interest rates in these three states, the third is the protection of the Euro and the last is the creation of orderly markets. It is very worrying that Germany appears not to comprehend these needs at present.

These measures might work. The first two, at least, are drastic,but so is the current crisis. We are in the death throes of capitalism 3.3 as Anatole Kalestky calls it. The death throes of an economic order are usually associated with war.That is something we to avoid. But we also have to be aware of the risk of that massive disruption, and embrace that idea when accepting the radical reordering of the economic organisation of society that we require. I have no doubt that what will emerge will be capitalism: indeed, it should be. But it will not be the same capitalism as we have now, and it will recognise its strong underpinnings in the foundation of democratic states to which it is accountable.

I believe that is possible but I will also be honest: I am worried, just about as much so as I was in September 2008.

16 Responses

A depressing read for first thing Friday morning, Richard. Made all the more so because I watched Michael Moore’s Capitalism: a love story, yesterday evening. Whatever criticisms might be levelled at Moore’s way with documentaries it’s a searing indictment of where unbridled capitalism has taken the majority of ordinary Americans since the 1980s. The scale and scope of greed, corruption, cronyism, self interest, hypocricy,and regulatory capture (to use the polite term you like to use here)on a scale beyond what’s imaginable in the UK currently (but almost certainly not for much longer)was truly shocking – and I class myself as a US watcher.

I sincerely hope your’re right about the demise of capitalism 3.3. But with my political scientist’s head on I stongly suspect not. The power of capital and the elites which feed off it in our society is far stronger and entrenched than most people can imagine (as Moore’s film graphically illustrated).

I think you’re right to be concerned, in my darker moments I worry that they’re just crazy enough to create WW3, maybe via N/S Korea. I was appalled that so little was done on the back of the original crisis. But can’t see that further QE is of any benefit, it only seems to have been used to transfer risk so far. There’s safety in numbers and the war drums only get louder with a euro breakup and the rise of nationalistic fervour. I agree that any level of debt is worth it to avoid this. Nationalsim didn’t work before and things are just too interconnected for it to work now.

But there needs to be some longer term joined up thinking on the back of this. A good hard look at banking, fiat currency, central banks and risk. I think Merkel really knows her stuff and is treading a very fine line in a euro/dollar battle. The rest of the EU needs to get behind her, give her some breathing space. I’d also muzzle clowns like Nigel Farage…but maybe that’s just wishful thinking.

Banks, investment institutions and their professioal allies (accountants, lawyers etc) have subverted the international economic system in the pursuit of private monetary advantage for their senior or ‘star’ employees and fellow financial manipulators. In very large part they create no ‘wealth’ but collect rent to the disadvantage of everyone else, including their own shareholders, customers and the bulk of their employees The fact that they pay part of these misappropriated sums back to the state in tax (after hugely ingenious international manipulations to minimise the amount) is totally irrelevant to the argument or the true well-being of citizens. There is no other explanation for the vastly disproportionate increase in the value of financial trades in relation to other commercial activity (nor for the now routine ability of senior bank personnel to collect scores of millions annually regardless of the true merits of their performance), but there is also ample comment from independent and knowledgeable observers to explain the process in detail. Such bankers and others have imposed material hardship on everyone else, plundered the state, imperilled the economic system, and continue to do so. They have captured state regulation and government interest in every free-market country of any consequence. They remain almost totally unreformed. The crisis is far from over yet. It has scarcely begun. In any reasonable person it generates fear not envy. It is everyone’s business. Every politician in our own new government, from Osborne to Cable and back, has either sold out or collapsed in the face of enormously effective, resourced and dangerous vested interests – the kind of international banking interests that the recent Irish ‘rescue’ is designed to preserve.

Capitalism has been very good: it has lifted huge numbers out of serfdom and has generated huge advances in technology. But we only have one planet and its obvious that we cannot base our entire way of life on the idea of endless growth.
Capitalism is ultimately based on desire, on wanting and consuming, and that never made anybody happy. We need to move to a culture based on sustainability, on being happy with what we have, on reflecting upon the fantastic position we are in (we live in times of peace and have sufficient food, water and warmth).
But I think a sustainable future has to be built around much smaller central states and much stronger local communities. People need to be reconnected to nature, to food production, to the seasons. Ultimately, people need to reconnect to the physical world rather than the financial world. The internet and digital communications mean we can achieve this without the parochialism of the past. But we need to learn to value what we have over what we want. Because what we want will not make us happy and will destroy the environment.

I don’t share the extent of the doom predicted: we all know that financial markets overshoot and overreact. But another lesson from history is also that they will only do this as long as they can make money from blindness. And I hope that this will change once parallels between Greece and Ireland can be drawn more clearly. Can it be that corruption is the biggest single common denominator? 20% ghost paper profits in Ireland, manipulated numbers in the government in Greece. How do worldwide profits flow to Ireland? Through artificial, corrupt practices that seek to weasel around conscience. A similar intention must have driven the Greek politicians when botching up the national accounts. Perhaps there is a lesson here, that corruption and the facilitation or condoning thereof does not pay, no matter if the immediate harm hits people far off or is delayed into the future. I believe the markets will become aware of this – unless of course this extent of casino-like tampering with numbers and finance is found elsewhere, too. I would not think that Spain, Belgium, Italy, or anybody in the EU, except Luxembourg, will be in danger of this.

Capitalism has been very good: it has lifted huge numbers out of serfdom

Well that’s what they claim, most things that I value came about due to social development and struggle.
I do like the idea that capitalists (which most of us aren’t as we have insufficient working capital, and it wouldn’t work if everyone was at it) have been working so hard for the common good.

As I’ve said before, if you think a better world is going to somehow spring out of this mire, you are going to be disappointed.

‘The first general stumbling of the industrial capitalist economy is reflected in a marked slowing down in growth, perhaps even in decline, in the British national income at this period [1830-40s). Nor was this a purely British phenomenon.
Its most serious consequences were social: the transition to the new economy created misery and discontent… Nor was the discontent confined to the labouring poor…The great financiers, the tight community of home and foreign “fundholders” who received what all paid in taxes – something like 8% of the entire national income – were perhaps even more unpopular among small businessmen, farmers and the like than among laboureres, for these knew enough about money and credit to feel personal rage at their disadvantage. It was all very well the rich, who could raise all the credit they needed, to clamp rigid deflation and monetary orthodoxy on the economy after the Napoleonic Wars; it was the little man who suffered…’

I agree with you Richard, and I’m simultaneously hopeful and fearful about the future of EU – and global – economic policy. Hopeful because the attempts to fix the neoliberal economic model just by throwing ever more money at the banks and the bankers are in the process of being exposed as a busted flush, and so it strikes me we are coming to the end of the neoliberal road.

But I’m fearful because the left still hasn’t really got its act together in terms of proposing a genuine alternative – there are a few of us out there with half an idea as to what should be happening, but far too many people are still misguidedly trying to fix the old system with ever-larger sticking plasters.

And if the left doesn’t get its act together and start pushing for a genuine alternative, the populist right could step into the vacuum…. with absolutely disastrous consequences, as in the 1930s.

i Capitalism has been very good: it has lifted huge numbers out of serfdom and has generated huge advances in technology.

This is one of the many myths that keeps being parroted. It’s utterly meaningless. As Richard makes clear, it’s not “capitalism” that’s the problem – it’s the form of free market we have now, and the shadow finance economy which dominates everything. Beyond that, human progress has been happening since humans arrived on the planet. It’s a natural part of being human. From stone axes (the most beautiful and rarest of which were traded globally as “expensive” objects, not for use), through bronze and iron, through the industrial age we’ve had technological and scientific advances. Some have been brought about by private capital, most by government – or at least centralised – funding and organisation. It can only ever happen with people working together, as societies. For much of that time, we’ve had serfdom and slavery; for all of it we’ve had poverty.

This idea that we can only possibly develop with capitalism and democracy exactly as we have it now just doesn’t hold water.

What’s lifted people out of grinding poverty, and made the biggest social developments, and released the most human potential is not “capitalism”; it’s the welfare state. Making sure being born into poverty doesn’t mean having your talent and potential written off, or becoming ill doesn’t mean starvation, or mass unemployment doesn’t mean spending stops. I’m all for capitalism, if it means (as it should) that anyone can be an entrepreneur, small businesses can be formed and compete, and people’s energy can be harnessed to create vibrant, local businesses. That kind of capitalism needs a strong welfare state, good regulation, and controls on the kind of out-of-control big business and global finance we have now.

The biggest strides taken in recent years in lifting people out of poverty have been in undemocratic, big government, China. And developing countries have not been slow to understand this – they’re rejecting ‘help’ from IMF and World Bank. Despite its eventual mess, communist Russia started off with a similar leap forward. I understand that South Korea is another good example of state controlled development. Big, intelligent, government is good when the going gets tough.

Another journalist to keep an eye on with respect to the business of war is the American Jeremy Scahill who spent quite a bit of enery studying the Iraq and has now recently returned from Afghanistan.

We’re at war alright. We just don’t seem to pay attention because we Brits recognise our involvement in war happening when we are being blitzed, have to hide in pub cellars (that was my mum’s nearest bomb shelter), tube stations etc and make sure we have black-out curtains up.

Luckily I also bought a big stockpile of canned food when the world was going down the toilet in 2008 so this time round I don’t need to frantically stockpile the tins of beans ….

What is important to bear in mind when any bail out is being orchestrated is that it is not the country in debt that is being bailed out but those who have lent the money to them, in this case it is really the ECB who is being bailed out for lending good money for garbage bank assets, they need this bailout as they have much more and worse garbage from Spain to worry about. The Irish should stand up for themselves and force a heavy restructuring on the ECB and other creditors, then it is well on the road to recovery live iceland is now, while the rest of the euro zone will be dragged into the abyss and have to face up to the fact that the ecb has been showering “liquidity” on Spanish banks for their garbage assets for way too long ….